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KCTS-TV concedes that it misappropriated Gates-related money.

AS PUBLIC KCTS-TV struggles to get back on its feet after years of financial mismanagement, a major provider of money has discovered some of the most damaging information yet. The Bill and Melinda Gates Foundation, which pledged $11 million to the station for a conversion to digital technology, says KCTS misappropriated $2.1 million. Channel 9 used the money in large part to pay a debt to the Public Broadcasting Service (PBS), according to the foundation and KCTS. The station first revealed this in a report to the foundation a couple of weeks ago.

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The money in question did not come from the Gates Foundation itself, KCTS says, but from matching funds raised as a prerequisite for the Gates money. The station is supposed to raise $5 million from other sources for the capital campaign, which entails buying equipment for high-definition TV. Doling out its grant over several years, the Gates Foundation so far has delivered $9.3 million.

"From our perspective, it's irrelevant," foundation spokesperson Joe Cerrell says of whose money was spent. Indeed, he says, it's difficult to determine what was Gates money and what were matching funds because KCTS lumped them together in the same account, classified in the station's books as "restricted"only for a specified purpose. To disregard such a restriction is considered a cardinal sin in the philanthropic world. Says Jane White, co-president of the Puget Sound Grant Writers Association: "You raise money, you use it only for the purpose for which it was raised." It's also illegal to use donations for a purpose different than what they were raised for. Gates Foundation officials say they don't think this is a criminal matter, in part because KCTS mitigated its actions through nimble accounting. The station replaced the cash from the digital fund with collateraltwo pieces of donated property and "accounts receivable" reflecting money it expected from a federal grant and other funding.

"I don't think it changed the integrity of the fund," says KCTS' new CEO, Bill Mohler, who arrived after the money was spent. "The dollar value is still there." Mohler, who took over from ousted KCTS chief Burnill Clark, concedes the decision should have been handled more "forthrightly."

KCTS chief financial officer Jackie Boettcher says the station faced an untenable situation. In Aprilwhen, remarkably, the station was under scrutiny by Seattle Weekly and The Seattle Times for its financial practicesthe station was months late with an audit it was supposed to submit to the Corporation for Public Broadcasting (CPB), the entity that doles out federal money. CPB was withholding its annual grant to KCTS. Meanwhile, the station was supposed to pay $1.5 million of $3 million in deferred back dues owed PBS. KCTS knew that PBS was not going to accept further delay. Says Boettcher: "Our options with them as a banker were gone." So, she says, the station had a dilemma: "Do we threaten our relationship with PBS, or do we threaten our relationship with the capital campaign's major funder?" She says "the board went over and over this" and decided on the latter. "It was hard," she says, but "it's not as if we didn't have collateral to back that situation up. It made us feel that it was only going to be a temporary situation."

The station's relationship with the Gates Foundation is strained but not broken. Foundation officials say they will monitor how the station is using their money more closely and expect the $2.1 million to be returned to the digital fund. As for the $1.7 million of the foundation's pledge yet to be delivered, they are still deciding if and when that will occur.